Swan's slow-motion crash

"Watch out boys, we're going to have a crash!" shouted my father 30 years ago as our Kingswood aqua-planed down Perth's Stirling Highway towards a stationary car. My brother and I braced, but it felt as if the long skid we were in lasted minutes, not seconds. Then crunch.

I'm getting that feeling again as the Australian economy glides towards the May 8 federal budget and the 'surplus we had to have'.

This time it's the Australian Chamber of Commerce and Industry yelling "we're going to have a crash". ACCI's business confidence index, released yesterday, makes chilling reading – not for the headline index figure, which dips from 50.2 in March (indicating slight business expansion) to a contractionary 49.6 for expectations in the months ahead, but for some of the details buried in the report.

Job prospects look bleak (see table below). A year ago 18.4 per cent of firms thought their full-time head count would be 'somewhat higher', but now only 11.1 per cent believe that. The number of firms thinking their headcount will be 'about the same' or 'somewhat lower' hasn't changed much.

But the really scary figure is in the last line: 10.2 per cent of firms surveyed expected 'much lower' numbers of full-time employees. That's well over a five-fold increase on last year's figure.



ACCI has used the survey to call for the Reserve Bank to cut interest rates today, to give a much needed boost to investment and, thereby, jobs growth in the ailing non-resources sectors of the economy – retail, tourism, manufacturing and, as Robert Gottliebsen highlighted yesterday, food manufacturing in particular (Seeking a manufacturing saviour, April 2).

The unions also want a rate cut to get things moving. The CFMEU has accused the RBA of "twiddling its thumbs" and predicts "job losses for thousands upon thousands of Australians" if the central bank doesn't start to take account of the blight spreading across southeastern Australia.

The rate-cut calls will most likely fall on deaf ears. We have a mini-version of the European Union's long-running monetary conundrum on our hands – the ECB has long had to balance the monetary needs of highly productive economies (especially Germany) with laggards such as Greece and Italy. Here, the Reserve Bank wants to set the cash rate lower for the south east, and higher for the booming resources regions. If only we had two currencies in Australia, not one, it could do its job (perhaps we could introduce a 'south east drachma'?).

Cutting rates too far at the present time carries serious risks, particularly from the high dollar. Australian imports have become substantially cheaper in the past 18 months since the dollar climbed through to US90 cents mark and made the steady climb to its present level of around US104 cents. A small reversal in the AUD/USD exchange rate could add substantially to inflation, which is expected currently expected to settle out at around 2.6 per cent by the end of the year.

And yet not cutting far enough will force business closures at the margins, and job losses in those companies closest to going under.

In more normal times the hamstrung position the Reserve Bank finds itself in would be less of a problem because, until the GFC, the need to avoid a federal budget deficit at all costs just didn't exist. The obsession with clearing the nation's credit card (currently worth about 7.5 per cent of GDP) is a recent political development – the opposition, cheered on by an uncritical media, have convinced voters that zero deficit and a rapid pay-down of the national debt is the only way forward. And poll-driven Labor is happy to appease the same voters.

Paying down debt by eliminating deficits is a highly desirable goal in good times, but when business confidence is plummeting, does it really make sense to strip 2.6 per cent (Swan's budget heartbreak, April 2) from GDP by massive cuts to public spending? Not at all.

If Tony Abbott wins the next election, it will be on the back of promises to make spending cuts even larger than those expected from Labor on May 8. As a result of Labor's cuts, and his own, Abbott will preside over a jobs market far worse than should have been the case. How Abbott (or a Labor government, should that near-impossibility come to pass) will turn voter sentiment back in favour of a little Keynesian stimulus if the jobs market tanks is far from clear.

And high unemployment in the south-east states won't be the only problem the next government has to explain to voters. If ACCI's members' pessimism is not misplaced, and layoffs do become more widespread, the news for the housing market will be very bad.

As Christopher Joye noted yesterday, "For the best part of the last six years, the growth in Australian housing credit has tracked household incomes almost exactly 1:1" (Signs of house price life, April 2).

That sounds about right. Labor shortages in the Pilbara and Kimberley continue to push mining wages sky high, so credit growth for housing in resources regions will continue apace.

But then most voters don't live there. With one in ten firms predicting "much lower" levels of full-time staff across the economy more generally, it's hard to see how credit growth in Sydney and Melbourne is going to keep property prices afloat. It's aggregate wages that determine aggregate demand for credit, not just pay rises for the lucky few.

Australia looks likely to learn a harsh lesson from the 2012/13 federal budget – the pain of recession outside the resources sector might even be enough to make voters realise a simple fact: our national media got it wrong when it swallowed the Coalition line that Australia Inc must run its balance sheet totally ungeared.

Instead of parroting the Coalition's 'debt and deficit' line, a better headline might be: "Watch out boys, we're going to have a crash."

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